Finding hot stocks to buy is not as hard as it sounds. The hard part is figuring out which ones will remain. But this year is off to a good start, as the S&P 500 had already risen 3.3% on this year.
Companies like Amazon, Alphabet, Facebook, and Alibaba are among the largest services in the world.
They were all founded in the mid to late 1990s except for Facebook which started in 2004. Incredible when you consider that The New York Stock Exchange is over 200 years old.
Technology is now a key driver in the economy.
Chew on this…
The Walt Disney Company has been in business since 1923; however, Netflix was able to surpass them in market cap in the past year, despite Disney having a more than 70-year head-start.
Just keep in mind, the stocks to buy now might not be the ones to buy a decade from now. Companies like General Electric, AIG, and Eastman Kodak were all part of the Dow Jones Averages at one point.
Finding Stocks To Buy – Day Trading
Day traders need volatility to make quick money from the market. Figuring out what to trade often happens during the pre-market time. Traders will look at which ones are moving the most and see if there are any possible trades out there.
You can find this information on most trading platforms or services. Also, websites like finviz.com and nasdaq.com.
Generally, most stocks don’t trade before the market opens at 9:30 AM ET unless it has a catalyst.
If you look above, you’ll see that Dave & Buster’s (NASD: PLAY) was trading 4.3% higher in the pre-market. The catalyst was a quarterly earnings release that it disclosed earlier that morning.
A catalyst can be an earnings release, analyst action (buy/sell recommendation), press release, rumors, news about the company or something that can materially affect its business.
Here are some recent catalysts and its impact on its stock price:
Tesla (NASD: TSLA)
Tesla’s stock has surged nearly 132% since this year only. But let’s take a quick glance to the past. On September 6, 2018, Tesla Ceo Elon Musk does a podcast interview with Joe Rogan. During the meeting, the two appear to pass along and puff on a cigar mixed with marijuana and tobacco.
The following morning Tesla shares fell sharply lower. As you can see, this is an example of a negative catalyst.
Canopy Growth Corporation (NYSE: CGC)
On August 15, 2018, Constellation Brands, maker of Corona beer, announced it was investing $4B into pot stock Canopy Growth Corporation.
When a top corporation expresses so much interest in a relatively young and unproven company, it’s generally viewed as a positive catalyst.
That said, the day of the announcement, Canopy saw its stock rise by more than 30% from the previous day close.
Websites such as finviz, yahoo finance, and Twitter are excellent resources when searching for stock news.
The Story Matters When You’re Looking For Stocks To Buy
Since we’re talking about hot stocks, a juicy story will always trump fundamentals in the short-term. Constellation’s investment into Canopy strengthed the narrative. Many traders were speculating on the cannabis stock well before Constellation’s investment announcement; however, what it did was legitimize the industry.
Marijuana is illegal in the United States on the federal level. That said, many investors have been reluctant to invest in the space because of the federal law.
Constellation’s move took some fear away from investors, and it caused others in the sector to rise also.
The most famous being Tilray (NASD: TLRY), a recent IPO that went from $17 to $300 in about two months.
Its catalysts included:
- A strong earnings report
- One of only a handful of pot stocks that trade on the Nasdaq or NYSE
- Canada set to legalize recreational marijuana later in the year
- A vast majority of the shares were borrowed and shorted, causing the stock to be placed on the REG SHO threshold security list.
Did it make sense that Tilray was trading by nearly 700 times its sales with a market cap of more than $20B?
Not really… but the stock market doesn’t care.
Psychology plays a significant role when trading. Emotions such as fear and greed take over, and financial fundamentals get thrown out the window.
Tilray eventually dropped by more than 50%, two days after it hit $300 per share.
Buying Hot Stocks – Have An Exit Plan
Tilray’s short-term move was based on a supply and demand factor. Too many traders were short the stock causing it to squeeze higher.
Shifts in supply and demand can cause a stock to do crazy things. For example, in October of 2008, a massive short squeeze caused Volkswagen’s stock to rise by more than 150% in one day, making it one of the largest companies in the world.
However, in the long-term, fundamentals matter. Volkswagen has never had a higher market cap as it did back in October of 2008.
High flying stocks typically mean-revert after having their explosive moves.
If you’re trading these, you have to be active and continuously track them. Day traders often will scalp them to try and turn in a quick profit. However, the most money is made by investors who are brave enough to hold on for more substantial gains. Of course, you’ll need to be able to deal with the volatile price swings.
Positive economic readings are putting this year to a good start, as the S&P 500 has already risen 3.3%. The hottest stocks now are usually accompanied by a juicy story. However, after a massive run-up expect the stock to cool off.
Compelling stories have spill-over effects. For example, Canopy Growth’s catalyst was able to get investors buying sympathy plays like Tilray and Cronos Group.
Now, you can use the price action as an indication of how powerful the catalyst is. In addition to price strength, tracking the trading volume is extremely important. Ideally, you want to see a stock trading at least more than three times its average daily volume. It shows that there is a great deal of financial interest in the name.
Also, pay attention to supply and demand dynamics of a stock. Companies such as Tilray and Volkswagen saw massive runups because of a short-squeeze. Having top information like short-interest, floating shares, earnings growth, and other fundamental market data can prove to be very helpful in your financial strategy.
Lastly, if you’re going to trade a hot stock… make sure to have a plan.